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Jamie Jemmeson
March 14, 2022

Fragility Remains Whilst BoE and FOMC Release Their Policy Update

BoE meeting postponed

Last week, markets continued to be driven by risk sentiment as the conflict continues to escalate. The main focus was the European Central Bank (ECB), who left key interest rates unchanged, including the deposit rate at -0.5% and the refinancing rate at 0.0%, but surprised financial markets by announcing net asset purchases will likely be completed by Q3 on a conditional basis; given the circumstances it was expected that this move may have been reversed. This statement resulted in the single currency initially strengthening prior to ECB President’s Lagarde’s press conference. President Lagarde emphasised the importance of policy flexibility during uncertain times. The previous guidance suggested a hike shortly after the end of QE, but that has been updated to a vaguer pledge that the first rise will be made ‘some time’ after the end of asset purchases. In theory, the first rate hike could now occur months after the end of QE. As a result, Lagarde denied that the ECB has embarked on policy normalisation and instead stressed that policy is data dependent.

In the meantime, US inflation continue to nudge higher. The report highlighted the annual inflation rate accelerated to 7.9%, up from 7.5% in January and hitting a new 4-year high. The hot inflation reading saw US stock futures fall on the prospect of higher interest rates and as investors swung back into risk-off mood. With oil prices surging, expectations are increasing of a break above the 8% annual inflation rate in March.

While news from the Ukrainian war will continue to drive market moves in the coming week, investors will also have a close eye on the monetary policy updates from the Bank of England and the US Federal Reserve

Will the Bank of England Raise Rates at the Next Meeting?

The key focus this week will be on the BoE meeting as the Monetary policy is due for release on Thursday. Developments in Ukraine are likely to feature highly on the agenda especially with the rise in oil prices of circa 40%. Survey and financial market-based measures of inflation expectations have also risen and are likely to climb higher still as the annual rate of inflation moves even further above target. The market expects a hiking Bank Rate by 25bp to 0.75% with the decision likely supported by most, if not all, nine members of the MPC. However, the market will be keener to understand the rhetoric that supports the decision making and whether this provides any signposting for the path of interest rates for the remainder of the year.

FOMC Set to Raise Rates but What will the Dot Plot Foreshadow?

As mentioned, inflation is running at 40 year high of 7.9% with the FOMC almost certain to raise rates on Wednesday. It is likely that first hike will be one of 25 basis points with a larger move of 50bp ruled out by the growing uncertainties. The market will be particularly interested in the dot plot (Fed member rate expectations), interest rate expectations have varied from 5 hikes to 7 over the calendar year so the market will be keen to articulate where this currently lies especially with the ongoing conflict impacting markets.

ECB President Lagarde Rhetoric to be Deciphered

It is a slightly quieter week for the region in terms of data, however the currency will remain sensitive to the ongoing conflict. On Tuesday, the ZEW survey is set for release from Germany and the Eurozone region. Following the ECB rate decision last week ECB President Lagarde is due to speak at an event hosted by the Institute for Monetary and Financial Stability on Thursday. The market will once again cross examine her rhetoric due to the mismatching of tone between the ECB monetary policy statement and press conference last week.  

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